Single Entry System - Net-worth Method - Definition - Meaning
Under net worth method or increased worth method, we make comparison between opening capital and closing capital in order to find out
the Profit or Loss made by the business during the year. All the activities taken by proprietor or sole owner would be resulted in the increased of net worth (Closing Capital - Opening
Capital) of the business for the accounting period and as a result, the business earns profit, otherwise business suffers a loss i.e., when closing capital is less than opening capital.
In other words, if there is a decrease in the net worth of the business, then there is a loss suffered by the business during the period.
During the period, the sole trader may withdraw cash or goods for his own personal use, so we add back to it in the profitable activities of the business if it was not withdrawn from
the business it would be utilized or still remained the part of profits of the business. Also, any additional or further capital introduced is also deducted from the profitable activities as it is not resulted from the profitable
activities of the business.
From the above discussion, we are now in a position to calculate profit / loss under net worth method of Single Entry System of Bookkeeping.
The Formula for the calculation of Profits is given below:
Profit / Loss = Capital At the End + Drawings - Fresh Capital - Capital At the beginning
Example:
Mr. A as a sold trader started his business on 1st January, 2019. On 1st January, 2019, the Furniture costing Rs. 1500000 purchased by him. Inventory Purchases recorded at Rs. 5000000.
On 31st December, 2019, Closing Inventory Valued at Rs. 1000000. Cash in hand and at bank recorded at Rs. 400000 and Rs.
500000. Accounts Receivable valued at Rs. 285000. Accounts Payable recorded at Rs. 500000. Furniture recorded at Rs. 1350000. Drawings for the period valued at Rs. 100000.
Required: Prepare Statement of Affairs at the beginning and end of the year in order to calculate net worth (increased in capital) of the business during the year.
Firstly, we find out the capital at the beginning and at the end by preparing Opening and Ending Statement of Affairs in order to find out increase in net worth (Capital) and then calculate the profit / loss for the year.
Mr. A’s Business
Statement of Affairs
As On 1st January, 2019
Assets Rs. in 000 Liabilities and Capital Rs. in 000
Inventory 500 Liabilities ---
Furniture 1500 Capital (Balance Figure) 2000
_____ _____
2000 2000
_____ _____
_____ _____
Mr. A’s Business
Statement of Affairs
As On 31st December, 2019
Assets Rs. in 000 Liabilities and Capital Rs. in 000
Cash in Hand 400 Accounts Payable 500
Cash at Bank 500 Capital (Balance Figure) 3035
Accounts Receivable 285
Inventory 1000
Furniture 1350
_____ _____
3535 3535
_____ _____
_____ _____
From the above two statements of affairs there is a increase in capital as shown below:
3035000 - 2000000 = Rs. 1035000
Now, we need to calculate the profit for the year by applying the formula as shown below:
Profit = Capital At the End + Drawings - Fresh Capital - Capital At the Beginning
Profit = 3035000 + 10000 - 2000000
Profit = Rs. 1135000
This is the profit (calculated under net worth method) earned by Mr. A calculated during the period from his business.
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